RaboResearch - Economic Research

Singapore: slowing growth, but still top notch

Country Report


Singapore flagSingapore flag

  • Singapore’s economy faces multiple headwinds both in the short and longer term
  • But, strong institutions and effective policymaking support (potential) growth
  • Owing to the landslide victory of PAP in the September’s national elections strong policy continuity is preserved
  • Meanwhile, healthy (international) balance sheets reduce Singapore’s susceptibility to shocks

Strengths (+) and weaknesses (-)

(+) Strong infrastructure, institutions and high quality of government officials

Policymaking is effective and amply responds to risks and shocks. Furthermore, the business environment is highly friendly and competitive: first in the Ease of Doing Business ranking and second in the Global Competitiveness Report. Yet, for an industrialised country, press freedom is limited.

(+) Very healthy public fiscal stance

Public debt is issued to offer a benchmark rate and absorb monies from the obligatory central pension fund, not to finance expenditure. Issuance proceeds are invested. Only half of the returns on net assets can be used for expenditure. Public net financial assets are large (around 80% of GDP).

(+) Strong international creditor position

The net international investment position (196% of GDP, 2015e) and international reserves (88% of GDP) are very large. As such, the risk of a balance of payment crisis is negligible and the scope for monetary policymaking, which targets the exchange rate, sizeable.Public external debt is zero.

(-) Very open city state that is ageing

Singapore’s economy is highly open and specialised in cyclically sensitive industries. Accordingly, it is susceptible to a slowdown in the world economy, and a possible hard landing in China could prove devastating. The state’s small size and rapidly ageing population limit potential growth. 

Key developments

1. Slight increase in household debt does not threaten solvency

In the third quarter of 2015, household debt slightly increased to 75.4% of GDP, from 74.3% a year earlier. Household debt is among the highest in the region, at about 220% of household income. Solvency risks are mitigated by extremely large household assets, which amount to more than six times liabilities. Even households’ liquid financial assets are larger than household debt.

Nevertheless, some households might be vulnerable to income and interest rate shocks. First, assets and liabilities are not necessarily equally divided among households. Second, 5-10% of households have debt-servicing ratios above 60%. Third, about 85% of all loans is at variable interest rates. But, according to the Monetary Authority Singapore (MAS), the mortgage servicing burden would remain manageable for most households in scenarios where interest rates rise with 300bp and/ or incomes decline by 10%.

2. Risks related to the fall in house prices are manageable

Since the third quarter of 2013, house prices have fallen by 8.4% (figure 1), at least partly due to strong macro-prudential policy[1]. This barely endangers household debt solvency in our view, as the overall loan-to-value ratio is below 50% and on most housing loans below 80%. As house prices are still 50% higher than at the trough halfway 2009 and overvalued, a further fall in house prices cannot be ruled out. According to a recent stress test of the MAS, the banking sector could manage a sharp housing market correction. Still, some attention is warranted. 50% of the total loan portfolio in Domestic Banking Units is exposed to the property sector (November 2015) and a sharp housing market correction would likely hamper economic growth, as employment in and value added from real estate related activity, are substantial.

Figure 1: House prices are falling
Figure 1: House prices are fallingSource: Macrobond
Figure 2: Large trade links with US and China
Figure 2: Large trade links with US and ChinaSource: OECD

 3. GDP growth slowed on the back of weak exports

In 2015, economic growth slowed to around 2% (from 2.8% in 2014), the slowest pace in six years. Domestic demand remained healthy, but export growth was weak. The depreciation of the Singapore dollar over 2015 (7% against the US dollar and 2.9% relative to trading partner currencies based on consumer prices) was unable to compensate for China’s slowdown. Admittedly, the real effective exchange rate based on unit labour costs appreciated with 0.8% over 2015.

Looking forward, Singapore’s economy faces several headwinds. The MAS expects GDP volume to grow with between 1% and 3% in 2016 (in the past decade growth averaged 5.6%). Exports are hindered by expectedly relatively subdued economic growth in China and most other developing Asian countries in 2016. That said, exports towards Singapore’s major trading partner, the US (figure 2), are likely to benefit from the expensive US dollar. At the same time, the fall in house prices and employment growth constraints, exert downward pressure on domestic demand. Employment growth is constrained by the restrictions on hiring of foreign labour and the ageing population. The labour market is expected to remain tight, though, with a very low unemployment rate (2% in 2015). As such, wage growth is expected to remain robust. This is to the disadvantage of export growth as productivity growth has stagnated, but to the advantage of domestic demand. Fiscal policy is expected to support domestic demand going forward, but to remain prudent (new budget will be set in February).

4. People’s Action Party won September elections

The incumbent People’s Action Party (PAP) strongly won the parliamentary elections in September 2015. The PAP obtained 83 out of 89 seats, due to which policy continuity is preserved. For example policy including augmentations of the social safety net and restructuring the economic growth model. The government intends to change the model from one based on cheap low-skilled labour towards one based on productivity growth, in order to cushion the negative effects of an ageing population and tighter rules for foreign labour. Examples of measures introduced are levies for firms with low-skilled workers; as well as (tax) incentives for investment in productivity enhancing technology and skills training. Restructuring of the growth model might be somewhat delayed to support the struggling economy, .e.g. by postponing a further increase in levies on low-skilled workers. But, the government is likely to intensify productivity enhancing measures.

Factsheet of Singapore
Factsheet of SingaporeSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

[1] In 2013, the MAS introduced a limit on the loan-to-value ratio for new loans of 70% and a cap on the Total Debt Servicing Ratio. Financial institutions should take into account borrowers’ other outstanding debt obligations when providing property loans. The MAS also introduced a rule that requires the mortgage borrower to be the holder of the legal title to the property, which inhibits rising prices due to speculation by foreign investors.

Background information

Singapore’s residents are wealthy and private balance sheets healthy. But, income inequality is rather high and the retirement replacement rate low. The government aims to tackle these issues.Public finances are strong. The government acts in accordance with the Government Securities Act: the sovereign cannot issue debt to finance expenditure. Still, Singapore has a high gross public debt ratio. Marketable debt securities are issued to create a benchmark yield. Non-tradable bonds are issued to create an investment vehicle with guaranteed returns for the country’s obligatory fully funded pension scheme.  Issuance proceeds are invested in the Government Securities Fund. The fiscal impact of the city state’s rapidly aging population (old-age dependency ratio of 1/2 in 2030) is minimised by the contribution based pension scheme and large public endowment funds to increment budgetary spending on social issues. Furthermore, to lower the impact of a tightening labour force on potential GDP, the government has introduced measures to restructure the economy to enhance productivity. The effectiveness of these measures still has to be proven though.

Banking sector regulation and supervision are strong and domestic banks are among the healthiest in the world. Capital and liquidity ratios, profitability and reliance on deposit funding are high and the non-performing loan ratio is very low (1.5%, 2015Q3). With strong macro-prudential policy, the Monetary Authority Singapore curbs excessive household borrowing. Yet there are some challenges. Total banking sector assets (556% of GDP, 2014) and external debt (294% of GDP, 2015) are very large. The interconnectedness with other financial centres makes the sector vulnerable to deep global financial crises. 

Economic indicators of Singapore
Economic indicators of SingaporeSource: EIU

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